Broadway Financial Corporation — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011. Broadway Financial is a bank holding company whose principal subsidiary is Broadway Federal Bank, a thrift focused on real estate and other lending. Financial statements are unaudited.
Key financial results and position
- Q3 2011: Interest income was $6.25 million and net interest income before loan-loss provision was $4.33 million, down 15% from $5.12 million in Q3 2010. The loan-loss provision was $3.81 million; net loss was $7.53 million, or $4.47 per common share, compared with a $156,000 loss, or $0.25 per share, a year earlier.
- First nine months: Interest income was $19.30 million and net interest income before provision was $13.11 million, down 18% from $15.92 million. The provision for loan losses was $8.49 million; net loss was $9.39 million, or $5.86 per common share, versus net earnings of $1.68 million, or $0.47 per share, in 2010.
- Margins and costs: Q3 average interest-earning asset yield was 5.80%, up 10 basis points year over year; average interest-bearing liability cost was 1.90%, down 3 basis points. For the nine-month period, net interest margin declined 20 basis points year over year. The efficiency ratio increased to 71.03% for Q3 and 73.30% for nine months.
- Balance sheet at September 30: Total assets were $422.2 million, down 13% from year-end 2010. Net loans were $339.5 million; gross loans were $358.5 million, down $44.1 million. Deposits were $294.9 million, down $53.6 million. Cash and cash equivalents were $21.0 million. FHLB advances were $87.0 million, junior subordinated debentures $6.0 million, and other borrowings $5.0 million. Stockholders’ equity was $23.0 million, down from $32.9 million.
- Credit quality: The allowance for loan losses was $19.8 million, or 5.52% of gross loans, versus $20.5 million, or 5.08%, at year-end. Nine-month net charge-offs were $9.1 million, compared with $4.6 million in 2010. Non-performing assets were $53.3 million, or 12.63% of assets, versus $46.5 million, or 9.60%, at year-end; nonaccrual loans were $48.0 million. REO was $5.4 million.
- Cash flow, nine months: Operating activities generated $5.3 million; investing activities generated $47.0 million; financing activities used $53.3 million, mainly reflecting the $53.6 million deposit decline. Cash and cash equivalents decreased $1.0 million to $21.0 million.
Material changes versus comparable periods
- Higher credit costs were the principal driver of the deterioration in earnings. Q3’s loan-loss provision included a $3.6 million charge-off of a commercial loan relationship; the nine-month provision also reflected a $3.0 million specific reserve on a commercial real estate loan.
- Non-interest income fell to $114,000 in Q3 from $1.02 million, and to $494,000 for nine months from $1.48 million. The 2010 comparison included CDFI Fund assistance and grant income.
- REO and held-for-sale loan loss provisions, reflecting lower property values, increased to $2.0 million in Q3 from $1.2 million. Nine-month REO provision was $2.0 million versus $780,000.
- The loan book and deposits contracted as the Bank reduced assets and allowed maturing certificates of deposit and brokered deposits to run off. Loan originations were $3.6 million for the first nine months versus $17.1 million in 2010.
Outlook, risks, contingencies, and unusual items
- Going concern: Management disclosed substantial doubt about the Company’s ability to continue as a going concern. The parent is in default on a $5.0 million line of credit due in 2010 and had stopped paying interest on that debt and its $6.0 million subordinated debentures in September 2010. The lender’s forbearance was set to expire January 1, 2012; the Company requested an extension, with no assurance it would be granted. Parent-company operating cash and a tax-sharing liability to the Bank are additional concerns.
- Recapitalization: Management was pursuing exchanges of preferred stock and part of the defaulted line of credit for common stock, along with at least $5 million of new equity proceeds. The plan could issue approximately 7.5 million new shares, about 80% of pro forma shares, and requires shareholder approval to increase authorized shares. Management said it believed implementation during 2012 was possible but gave no assurance. If capital cannot be raised, it planned to shrink assets, sell headquarters, reduce non-performing assets, and pursue earnings improvements.
- Regulatory constraints: Cease-and-desist orders prohibit dividends without OCC approval and restrict Company debt and capital actions. The Bank’s actual Tier 1 capital-to-assets ratio was 8.16% against an 8.00% order requirement; total risk-based capital was 12.21% against a 12.00% requirement. Although it met generally applicable “well-capitalized” ratios, the Bank could not be classified as well-capitalized while subject to the order.
- Taxes: The Company recorded a $6.9 million valuation allowance against deferred tax assets, up from $507,000 at year-end 2010, citing losses and insufficient projected future taxable income. Q3 income tax expense was $3.1 million despite a pretax loss, reflecting tax provision true-ups and the deferred-tax valuation allowance.
- Other risks and unusual items: A former Bank loan officer was under an OTS investigation relating to loan documentation and possible unauthorized benefits; the Company said it had reviewed the loans and incorporated relevant findings into its reserves. A consumer-loan litigation settlement contributed to $1.8 million of consumer loan charge-offs. The filing provides no formal earnings or operating guidance.
Important facts for investors to verify
- Whether the lender extended forbearance beyond January 1, 2012, and the status and terms of the proposed recapitalization, equity raise, and required shareholder approval.
- Whether the Bank maintains the capital ratios required by its cease-and-desist order and whether regulatory restrictions or actions change.
- Trends in non-performing assets, delinquencies, charge-offs, collateral values, and adequacy of loan and REO reserves.
- Whether deposit runoff, parent-company cash needs, the tax-sharing liability, and debt interest obligations create additional liquidity pressure.
- Developments in the OTS investigation and any related credit losses, legal exposure, or regulatory consequences.